Nu Holdings Analysis

[stewaj1]

Thank you to @intjudo for introducing Nu Holdings in the post Market inefficiency in Brazilian fintech? - #7 by intjudo. I have been researching this Latin American bank over the last few days and was impressed. I’m leaning toward selling some TTD and Pure Storage to free up funds to buy it. Below is my analysis; if you see flaws or feel I need to include something, please let me know so I can become more intelligent about Nu.

CEO and Founder - David Velez, born in 1982 (age 42) is their CEO and founder. Born in Columbia, his family fled to Costa Rica when he was 9 to escape violence caused by warring drug cartels. He was educated at Stanford. Before starting Nubank, he did stints in investment banking at Morgan Stanley, private equity at General Atlantic, and venture capital at Sequoia. He started Nubank after seeing that 5 Brazilian banks controlled 80% of the market and charged high fees for basic financial products. He saw an opportunity for disruption. I watched both videos of him that were recommended in previous threads. He comes across as charismatic and smart yet genuine and humble. He still seems hungry and feels like he’s just getting started. I like founder led companies and feel good with him at the helm.

Revenue - Currently growing at 63.5% YoY and 14% QoQ. Growth has been decelerating as they grow in size, but 60% is still great for a company with $7B in revenue in the past year.

Customers - Currently at 89.1M, which is 26% growth YoY. There are ~650M potential customers in Latin America. They have good market penetration in Brazil and have just entered the Columbian and Mexican markets. Their future TAM looks good. They have a Net Promoter Score of over 90, one of the highest in the world for a consumer company, let alone in financial services.

Net Income - $303M in most recent quarterly results (Q3 2023). Net Income has been accelerating every quarter so far in 2023.

EPS - $0.06 in the most recent quarter. They have been consistently profitable in 2023, growing EPS every quarter.

PE - At the current stock price of $9.26, the trailing PE is 121.24, which concerns me. The consensus estimate for 2024 is $0.34, which gives a PE of 27.2. Still high for a banking stock, but few are growing at 60%.

Efficiency Ratio - (How much they spend to make a dollar). Nu’s efficiency ratio is 35%, which is amazing when you consider the average efficiency ratio for the top 100 banks, which is 59%. They have been driving this number further down every quarter in 2023.

Biggest Risks - Deteriorating loan credit quality could be a risk. Nu has developed good underwriting models because their first product in Brazil was a credit card, and Brazil doesn’t have a FICO score they can leverage. Therefore, they had to develop a good underwriting discipline to make their credit card product profitable. Would these same models apply to Mexico and Columbia as they expand in those markets? Something to watch. There are also macro risks, given that Latin America is a developing market with more geopolitical volatility.

[intjudo]

@stewaj1 ,

I’m looking into $NU myself.

One thing I’m realizing is I don’t think $NU is even competing with the oligopoly banks in Brazil, not materially, not yet. Here’s my thinking:

1. The legacy of banking transactions in Brazil is they historically were done face-to-face, which meant:

• The assets required to open physical bank locations were a huge barrier to entry
• The ongoing expense of staffing and maintaining the physical locations was another big barrier
• Certain demographics were deemed insufficiently profitable to justify opening bank locations

As a result of the above, a HUGE percentage of the population in Brazil was unbanked; nobody wanted their business because it wasn’t profitable enough.

As detailed my post you referenced ( https://discussion.fool.com/t/market-inefficiency-in-brazilian-fintech/ ), the Brazilian government found the situation untenable due to the economic disadvantage of so many un-banked citizens, and responded by enacting legislation that served to incubate a thriving ecosystem of fintechs, including $NU.

Anyway, my point is the oligopoly banks are HELPLESS when it comes to business of lower-income Brazilians because the things that give them their moat with high-income Brazilians (physical locations etc.) are EXACTLY the things that make it IMPOSSIBLE for them to profitably serve low-income Brazilians. So all they can do is watch helplessly while $NU gobbles all the lower-income customers, which $NU can service profitably because unlike the oligopoly banks $NU is an asset-light business!

I’m still in the beginning stages of learning about $NU, but it looks to me like they haven’t yet made a material attempt to go after higher-income Brazilians; in any case I doubt they have materially penetrated that market. They’re too busy growing revenue leaps and bonds with the lower-income portion of the market.

But I’m also thinking: once $NU decides to get serious about pursuing the high-income portion of the market, WATCH OUT ABOVE !

[stewaj1]

@intjudo

Per the below slide from their latest quarterly earnings announcement, they have 12.4 million customers using their investment product, which I assume is for more affluent customers who likely used the traditional banking system. The 12.4 million represents a 100% YoY increase. Looks like Nu started with the underserved population with their credit card product but they have already started moving up the food chain.

[rmtzp]

@stewaj1 since you’re just starting to research Nubank, FYI I had also posted an overview last year; hope you find it helpful.

@stewaj1

Looks like Nu started with the underserved population with their credit card product but they have already started moving up the food chain.

Yes and no - while they started with the underserved population, they also attracted more affluent young adults, who prefer the digitally-native experience over the “legacy banks.” Similar to how young adults use neo-bank alternatives for day-to-day banking in the US/Europe (e.g., CashApp, Revolut, etc.)

From speaking to friends in Brazil/Mexico, the majority of this customer base only holds a subset of their deposits at Nubank (e.g., for day-to-day use) while maintaining a larger account with the legacy bank. Nubank will try to lure these customers to use their account more and more through cross-selling different products, such as its investment product. That’s why tracking the “# of products p/active customer” is an imperative metric; similar to how we want to see the module/product adoption of our SaaS companies expand!

-RMTZP

[rhill0123]

I just wanted to raise caution that there is complexity and opacity in bank stocks. Banking is a tough business. The question always comes down to “are they adequately reserving against losses in the credit operations”. I don’t know any way in which you and I can know that. So earnings can be an illusion and things can get out of hand quite quickly. There’s really only two protections, the history of the executives, particularly in risk management; second is the auditor who may be in a position to assess credit quality.

Personally I have taken pause in investing in banks other than the largest institutions with long histories and strong credit ratios.

It’s rare to find a bank growing this quickly. Are they being conservative or aggressive in their lending? I have no idea.

Of course, I’ve lost money every which way in Fintechs so take that into account when you consider what I’ve written here!

Rob

[FoolishJeff]

NU is a hard pass for me. I’ve never owned a bank stock. I’m not interested in owning bank stocks. And I’m even less interested in owning a South American bank stock. We talk a lot on this board about avoiding complicated stories that are hard to understand, this looks like it might be a prime example.

The company faces risks from rising defaults if Brazil enters an economic downturn. I doubt there are a lot of folks on this board that are qualified to assess the Brazilian economy or are actively following it. Also, how about the Mexican and Columbian markets? That is where Nu’s future growth is focused on. Are the underwriting models sustainable? I have no idea.

If someone can honestly say, they’ve successfully owned a lot of bank stocks, and have an excellent handle on the economies of Central and South America, then perhaps it might be a buy. But I doubt that is the case for most folks around here.

[rmtzp]

@FoolishJeff

NU is a hard pass for me. I’ve never owned a bank stock. I’m not interested in owning bank stocks. And I’m even less interested in owning a South American bank stock. We talk a lot on this board about avoiding complicated stories that are hard to understand, this looks like it might be a prime example.

I’m not going to try to promote Nubank as an investment to those uncomfortable – in fact, that’s the last thing I’d want to do. But I will counter the argument that about this being “a prime example complicated story that is too hard to understand.”

I do agree that investing in Nubank requires learning about metrics that we’re unaccustomed to in this forum. But since we’ve familiarized ourselves to the point of expertise regarding those metrics, I don’t think it’s terribly difficult to learn a few new concepts. In fact, I think it’s important to stretch our minds to open up to new ideas. There are actually a lot of parallels you can draw to SaaS metrics:

• Average revenue per customer? Not too different from NRR
• Number of products per active customer? Not too different from module adoption

I’m not saying it doesn’t require stepping out of our comfort zone. But I am saying that we have strong mental models in our toolkit to evaluate the company.

While I happened to be born in Latin America, and may be more exposed to Nubank’s story, I don’t think one needs to have a deep understanding on the Mexican and Colombian economies and underwriting models. I’m not saying one should jump the gun by having a superfluous understanding. What I’m saying is that the underlying thesis is not too different to those that have invested in Mercadolibre, or Sea Limited a few years ago – a better service in an antiquated market that customers are flocking to…that happens to be a pretty good business model under the hood.

This is about a company that has quadrupled revenue and gross profit in two years. Doubled customers to hit nearly 90M, and increased net income by $300M in that time frame. I’m not saying there aren’t risks. But as long as we closely monitor the company as we’re used to, I would expect to detect risks in the LatAm market or Nubank’s underwriting models before they become issues.

I’ll repeat – if folks that would rather stay out of this market, there’s no shortage of other opportunities – and I totally respect that. But I also think putting things in the “too hard bucket” too quickly can be self-limiting.

-RMTZP

[bulwnkl]

rmtzp,
You make some good points. It is a bit different than most investments, but it does have stellar growth and it’s become the largest online bank in the world. Q1 23 seems to be a turning point where they reached profitablity. New customer growth is now 6.5% QoQ and deposit growth 36.4% YoY is propelling the stock. I started holding in September, and Nu is up 32.5% since that time. It would be hard to compare this to a US Bank on traditional metrics like price to book, but we can say that revenue is up 71% YoY, and there are no US Banks that can compare with that.

If you want to compare any major metric, Nu Holdings provides a results spreadsheet, which makes data analysis fairly convenient.

Best,
bulwnkl

Long NU 11.9%

[intjudo]

Brazilian oligopoly banks are WAY too profitable for the SUB-STANDARD service they provide, and it’s been that way for FAR TOO LONG.

For instance, historically, average ROI of the Brazilian oligopoly banks has been TWICE that of U.S. banks.
( …I don’t have a reference for that on me at the moment; I’ll try to post some details later. )

And, as $NU says “your ROI is my opportunity” (LOL actually no they didn’t say that).

And: $NU is being super careful with their lending, cash-in-reserve etc.
And: they don’t ONLY provide banking services; they sell insurance, Brokerage services…

Long $NU 1%-ish, still learning, may add opportunistically depending on what I learn.

[intjudo]

Nubank reaches 44% of Brazil’s adult population - Nu International

As of the date on that article (Mach 14 2023):

• 44% of Brazil’s adult population was a $NU customer
• Brazilian operations accounted for 93% ($4.5 billion) of the total revenues in 2022

IMO at 44%, a lot of the Brazilian-customer-acquisition story is already behind them.
We can expect the rate of new Brazilian customers to slow down.

So what is the growth story going forward?
As stated in the article, $NU will need to “pivot from customer acquisition into further customer monetization.”

I think the story, and corresponding numbers, we need to track are summed up in this quote in the article by founder and CEO David Vélez:

“…we believe we are still in the early stages of the development of our model, with significant upside in terms of both top-line growth and operating leverage”

What can we track to prove or disprove these claims of Mr. Vélez’?

• That they are “in the early stages of the development of (their) model”
• That there is “significant upside” to be had in top-line growth
• That there is “significant upside” to be had in operating levererage

Here are some numbers from the article:

• Adjusted Net Income in FY’22 grew to $282 million, from $50 million in FY’21
• In Q4’22, Adjusted Annualized Return on Equity (ROE) reached 40%
• Regarding operating leverage, they claim their costs are “on average 85% below that of incumbent banks.”

Some new products they have released:

• Caixinhas (“Money Boxes”) (SUPER COOL IMO; more on that below)
• Their Investment offering already had 6 million investor clients as of the date of the above article “…making Nubank the largest digital investment platform in all of Latin America”!
• " Nubank has reached over 1 billion Pix transactions per month (23% of all Pix transactions in the country), breaking records in the new Brazilian instant payment system that is rapidly outpacing cash." (…I’m not sure if that’s profitable for $NU or not, but it’s definitely an indication that $NU is getting ingrained into a lot of daily lives!)
• Insurance: their "offering for Small and Medium Enterprises (SMEs), grew 114% YoY, (added 2.3 million customers)

Nubank makes Money Boxes available to its entire digital account customer...

Caixinhas (virtual “Money Boxes”) are a feature of every $NU account:

• Caixinhas “(…help customers) save money in an organized, uncomplicated, personalized way…”
• Each Caixinha has an objective: car, wedding, motorcycle, vacation, and birthday, Emergency Reserve, etc.
• Customers can customize their Caixinhas* with names and photos, linking the act of saving money to personal plans.
• "…more than 500,000 Caixinhas had been created

“Nubank’s innovation in creating Caixinhas has as one of its main purposes to blur the lines between the act of saving money and investing. We want to simplify people’s lives, organization, and financial plans to accelerate the process of achieving their dreams” , says Fernando Miranda, Vice-President of Investments at Nubank.

Potentially the coolest thing about Caixinhas IMO is how the idea was fleshed out via “…social media, customer service channels and on NuCommunity, an online platform dedicated to dialogue with customers.” I’d be interested to know If $NU has an effective feedback loop, prioritizing what Customers are telling them what they want (like $IOT does).

[MoneySpin]

@bulwnkl

It would be hard to compare this to a US Bank on traditional metrics like price to book, but we can say that revenue is up 71% YoY, and there are no US Banks that can compare with that

I agree @bulwnkl it doesn’t make sense to compare NU to “traditional” banks, but SOFI seems like it could be good comparison for NU. Of course SOFI does not currently have the same level of growth and profitability as NU but this is clearly accounted for in the differences in their valuations.

[stewaj1]

Thank you to @rhill0123 for raising the risk associated with complexity in bank stocks, especially around credit quality. I dug deeper into Nu’s credit quality. I compared their nonperforming loan percentage to the two largest banks in Latin America: Itau Unibanco Holding SA and Banco do Brasil SA. This is not an apples-to-apples comparison, as the three companies have different product mixes. Nu has a high percentage of credit card accounts in its portfolio, which carries a higher default risk. Nu also caters more to individuals than businesses.

I’m still digesting this data and its implications, but I wanted to share with this community what I have so far. All charts are from the 3rd Quarter 2023 investor presentations.

Nu Delinquency ratios:

Nu - a more detailed analysis of its credit card product and how its delinquency rates compare across income bands to the market for those bands:

Nu indicated their 6.1% delinquency rate is ~15% lower than the Brazilian industry. I can’t find independent verification.

Itau Unibanco Holding SA’s delinquency ratios:

Banco do Brasil SA’s delinquency rates.

[stewaj1]

In addition to the information in my above post regarding loan delinquencies, here is some information about the forecast for the Latin American Economy in 2024. The source is S&P Global Market Intelligence. Here is the link: Latin America: Key themes to watch in 2024 | S&P Global.

[JabbokRiver42]

This is a short blog post from Nov. 2023 about the unbanked in LATAM. This is the need NU, MELI, to some degree RELY, and others are trying to meet.

Understanding LATAM's Unbanked Population and Payment Needs

The unbanked population in LATAM is not a small, isolated group. It encompasses a significant portion of the region’s inhabitants.

• Statistical Overview: Recent studies suggest that nearly half of the adult population in LATAM lacks access to formal banking services.
• Geographical Disparities: Rural areas, in particular, face higher rates of financial exclusion compared to urban centers.
• Demographic Insights: Lower-income groups, women, and indigenous populations are disproportionately represented among the unbanked.

JR